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Let's say I'm designing a site, and Client and I agree that I'm going to purchase a slideshow to use on Client's site. The slideshow code costs $30.
I will mark this up to compensate me for my time in finding the slideshow, testing it, and learning how to use it. Is there a standard number for the markup? (Assume U.S. designer and client.) I've seen 20%, 25%, and the oddly specific 17.65%.
I don't know that there a "standard." I think it's whatever some people feel they can get away with.
I use 20% here. But that 20% covers only the money out of my pocket. Time in finding, editing, and/or testing are all billable hours to me. Above and beyond the actual cost of the product.
The common practice around these parts is to add 20%, but there is no standard amount. Having said that, I don't ever mark something up; it just goes straight through to the client. I like it better when I'm being compensated solely for design work, and I've never felt comfortable marking stuff up. Perhaps that stems from having spent too much time at the other end of things, managing a budget.
The way I see it, if I buy stock photography or code for a slideshow, I'm not adding value just because I bought it, so I don't add to its price, either. Research time is either built into the original quote or (occasionally) billed at an hourly rate.
Where the purchase is printing, I bill (or factor into the project quotation) the time I spend working with prepress or doing press checks, but even in cases where I've picked the printer and made all the arrangements I will usually have the print house make their financial arrangements with the client directly, rather than being a middleman.
For other expense items, I bill the client the expense immediately and separately from the project fee if it's more than a few hundred dollars, in which case, depending on the client, I may wait until I'm paid before proceeding with the purchase. These terms are always clearly laid out in the contract.
The only thing I consistently add are finance charges, such as when the payment is by credit card.
I don't know that you can have a "standard" markup that applies in general.
If you bill an hourly rate, you can roll the learning/integrating/testing aspects into your hours. Then you only have to markup whatever your financing is worth to you.
If you bill a flat rate without an hourly provision, you can't include the hours so you have to quote the client a rate that includes the cost of goods in addition to your hours.
Other factors are your client's payment terms and your cash position. If it's a relatively small purchase (like the example), you probably don't have to dip into a credit line and your exposure is low. Shouldering the cost is not likely to put you in a bind. You're also not put in a terrible position if the client can't/won't pay.
This scenario changes dramatically if you have to exercise credit, the client has extended credit terms, or the widget is expensive. In these situations, I typically quote the inclusion as a separate job with very short payment terms. If I have to shoulder the financial cost and risk, I weigh that situation on its individual merits and charge up accordingly. I don't (intentionally) deal with risky clients or extended payment terms, so usually I end up in the 15-20% range for this markup.
Advertising agencies mark-up in addition to employee billable rates. Don't short-change yourself. If you are thinking ahead and have added this to your billable rate, fine. But if you're trying to keep your rate low, mark-up at 20% and don't bat an eye. What you shouldn't do is eat the cost of your work. Often, you'll find that the client asks for something beyond your original bid/estimate. Mark-up 20%. If you know going in you'll need to make these purchases, build it in to the estimate. Simple as that.
Don't forget that if you're paying for these costs (printing or stock photos or a widget) out of pocket and waiting for the client to reimburse you, the mark up is also like a fee for "lending" them the money.
For reimbursable expenses, I always mark my invoices "due upon receipt" but many clients still take a while to pay them... time I'm out the money, on their behalf.
20% is not uncommon. I've always used 15%. For a client I really don't like or care to work with again I use 25%. For big purchases (eg, print costs) with clients I know will pay I've gone as low as 10%.
My goal is to bill the client for the added value I bring to their business (design and strategy) not my ability to make a purchase because it makes the process less hassle for me. In most cases, I consider 15% to be the bare minimum.
In general, 30% is the magic number that should cover the cost of transactions, time, interests, management and expertise.
20% is a bit borderline since you need to sometime pay for the exchange rate, the credit processing, taxes, and charging the client also count as a revenue.
For Example:
Elance used to charge close to 9% per project, and then the transaction in a Paypal or merchant account could be between 2% to 6%; you're already at 10-15%. Of course, this depends on your own payment system and tools you use. Maybe you use an invoicing system and/or accountant; this has a cost. Sometimes, there's a fee to transfer back the money to you, and something there's a currency exchange rate that is usually around 2.5% + the value of the currency. Your bank probably also charges you a fee per transaction. And your time has a value too even if you spend only 10 minutes to purchase something. On top of this, even though you can benefit from a tax credit on the product/service you purchased, you will still pay taxes on that revenue depending where you live and it might even put you in a higher bracket where the percentage of tax is higher too.
The best is to calculate all these transaction fees even if you don't need to pay them all the time. Keep in mind that buying stuff for your client is an extra service you offer, almost like a loan; you can always offer them to purchase the product themselves, sometimes it's also easier to manage the licenses, subscriptions and updates this way.
So when you get repaid for something you purchased, make sure you make a REAL profit on this and that it's worth it for you. At 30% you usually get a good margin for this and you don't waste your time with little 5% profits. For projects like printing, you should make sure you keep at least 10% for yourself.
The "oddly specific" 17.65% intrigued me. Here is why that number is sometimes used:
It has to do with the way that commissions are calculated, such that the agency ends up making a 15% profit on the total sale of the job.
http://adage.com/article/adage-encyclopedia/commission-system/98405/
The adage article didn't dive into the maths, but Mike spells it out pretty well here:
For posterity, If you want to make 15% profit on the sale of the job, rather than the cost, then by adding 17.65% to the cost of the job, you will end up making 15% off the total sale price.
Mike's illustration is:
Job Cost: $100,000
Mark Up: $17,650 = .1765 * 100,000
Sale price: $117,650
Profit percentage of Sale Price: 15% = $17,650 / $117,650
They way I do it is that I consider myself as an employee. Let me give you my example: Say I have a client that wants a brochure design, and print 5000 copies.
I calculate how long is going to take me to design that brochure, and calculate the price on an hourly bases. I calculate how much I would pay an employee (my self) plus all the standard monthly expenses (rent, internet and so on, and so forth) If my hourly rate comes up to $70. That is just the cost of production, and say is going to take the employee 8 hours to finish the project. That's $560.
Now, the printer is going to charge me..say 300 for printing the 5000 copies of the brochure, that's $860. if I just pass on the cost of the printer to the client, I am not, or my business is not making any money on this project. Keep in mind that I'm an employee. So, for my business to make money, I add a 20% mark up to $860. 20%of 860 is 172. So, 860+172= 1032. My quote to the client would be $1032. But the "actual" profit of this project is $172. Again, this is usually the way I do it, not sure if it's right or wrong. Let me know what you guys think.
